Goldman Sachs BDC Inc (GSBD) 2023 Q4 法說會逐字稿

Good morning, this is Austin Neri, a member of the Investor Relations team for Goldman Sachs BDC Inc., and I would like to welcome everyone to the Goldman Sachs BDC Inc., fourth-quarter 2023 earnings conference call. Please note that all participants will be in listen-only mode until the end of the call when we will open up the line for questions.

Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's belief regarding future events that by their nature are uncertain and outside of the company's control. The company's actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings.

This audiocast is copyrighted material of Goldman Sachs BDC Inc., and may not be duplicated, reproduced or rebroadcast without our consent. Yesterday after the market close, the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website, www.goldmansachsbdc.com, under the Investor Resources section, and which includes reconciliations of non-GAAP measures to the most directly comparable GAAP measures.

These documents should be reviewed in conjunction with the company's annual report on Form 10-K filed yesterday with the SEC. This conference call is being recorded today, Thursday, February 29, 2024, for replay purposes. I'll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC Inc.

Thank you, Austin. Good morning, everyone, and thank you for joining us for our fourth-quarter and 2023 fiscal yearend earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer; Tucker Greene, our Chief Operating Officer; and Stan Matuszewski, our Chief Financial Officer.

I'll begin the call by providing an update on the Goldman Sachs private credit platform before providing a brief overview of our fourth quarter results and then discuss the current market environment in more detail. I'll then turn the call over to David and Tucker to describe our portfolio activity and performance before handing it off to Stan to take us through our financial results. And then finally, we'll open the line for Q&A.

So that I'd like to provide a brief update for the Goldman Sachs private credit platform and the positive impact on GSPD of being part of it. We're proud to announce that next week marks the second anniversary of our platform integration process. This endeavor brought all of Goldman Sachs as private credit origination and underwriting capabilities as well as various pools of capital with track records that stretch back over 28 years under a single roof within our asset management business.

As you may recall, historically, our BDC complex, including GSBD, operated as a separate and distinct platform on the public side of the house that was walled off from the rest of the firm, they could not take full advantage of being part of the Goldman Sachs ecosystem. In these two short years, GSBD has been able to take advantage of the full origination capabilities of the broader private credit platform and its scale, enhance our infrastructure, and improve upon our underwriting capabilities.

I'd like to highlight a few examples. Amidst the volatile market and muted deal environment, the Goldman Sachs private credit platform remained active, deploying $12 billion in 2023. The Direct Lending Americas platform comprise the majority of activity with over $6 billion deployed. Furthermore, taking advantage of the broader scale and origination capabilities, GSBD served as agent or lead lender on well above the majority of its new deals in 2023.

Second, the team has spent the past two years actively upgrading GSBD's portfolio quality. As a point of reference, in the fourth quarter of 2021, just prior to the integration, GSBD had 89.3% at fair value in first-lien senior secured loans, whereas as of the fourth quarter of 2023, that figure stood at 95.3% at fair value. At the same time in the fourth quarter of 2021 second lien loans comprised 8.2% of the portfolio at fair value versus the fourth quarter of 2023 were second liens made up only 1.9% at fair value.

This is a result of actions we discussed in previous quarters, whereby repayments in junior lien positions have allowed us to redeploy capital into attractive opportunities, higher up in the capital structure, and we proactively took marks from legacy junior positions.

Finally, our integration has allowed for the significant expansion of our overall deal funnel to provide more proprietary and unique direct lending opportunities for GSBD. For example, since 2004, Goldman Sachs private credit has been a leading lender to the middle market wireless power sector deploying close to $7 billion of capital with no losses to date.

During the quarter the Goldman Sachs private credit platform served as a lead arranger on a senior secured facility to Skyway. Founded in 2005, Skyway is a Florida-based wireless tower operator with 445 towers in its portfolio. The facility continues a long-standing Goldman Sachs' relationship with the Skyway team, which began with the financing of the Skyway's first portfolio in 2011 before its sale to American Tower, followed by the financing of multiple subsequent tower portfolios, including the current ones. This is one example of a new set of investment opportunities made available to GSBD, resulting from our integration efforts.

Harrington is another example of an investment in the quarter where GSBD utilize the scale of the broader senior direct lending platform to provide a commitment for the entire facility that allowed this module to win the asset and we served as lead arranger. Harrington is a California-based specialty distributor of precision fluid control products across a variety of industry sectors.

We are proud that we've been able to capitalize on this thesis that we communicated to our shareholders and lenders when we integrated GSBD, and we remain committed to leveraging the broader private credit platform for the benefit of GSBD shareholders in the quarters and years ahead.

As we announced after the market closed yesterday, our Board declared a first quarter $0.45 per share dividend payable to shareholders of record as of March 28, 2024. This marks the company's 36th consecutive quarter of a $0.45 per share dividend totaling $16.20 per share since our IPO, excluding the special dividends we paid in 2021 post the merger with MMLC.

Net asset value was $14.62 per share as of December 31, 2023. This increase was primarily attributable to net investment income exceeding our quarterly dividend, partially offset by net realized and unrealized losses for the quarter. We had previously expressed confidence that deal volumes would increase as the year progressed and the trend indeed continued in the fourth quarter as it did in the third quarter.

During the fourth quarter, we reviewed more than 150 investment opportunities across our direct lending Americas platform and deployed capital at strong levels as David will expand upon in a bit. While we acknowledge that recent deal volumes have improved from recent lows in the past several quarters, we've also witnessed greater competition in the direct lending space resulting in spread tightening over the past several months.

We anticipate that as the overall deal environment improves, supply demand for private credit will align to support spread premiums and tighter lending terms in line with historical private credit underwriting experience. At the same time, it's worth considering that while the broadly syndicated loan market has also reopened, although primarily for near-term refinancings, this is a dynamic that's more impactful to the upper middle market to larger cap segments, whereas GSBD is more focused on the core of the middle market.

With that, let me turn it over to my Co-CEO, David Miller.

Thanks, Alex. During the quarter, we originated $166.2 million in new investment commitments to 14 new and four existing portfolio companies. Sales and repayment activity totaled $224 million, primarily driven by the full repayment and exit of investments in seven portfolio companies. In particular, as we continue to upgrade the quality of the portfolio, we are pleased with the full repayment of one junior lien position and exit of two equity positions, which will allow us to continue redeploying capital into new first-lien oriented opportunities.

Turning to portfolio composition. As of December 31, 2023, total investments in our portfolio were $3.4 billion at fair value, comprised of 97.2% in senior secured loans, including 91.1% in first lien, 4.2% first lien last-out unitranche, and 1.9% in second-lien debt, as well as a negligible amount in unsecured debt, and 2% in a combination of preferred and common stock and warrants.

As of quarter end, the company held investments in 144 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q4 was 11.8%, as compared to 11.6% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost remained at 12.6% at the end of Q4.

I will now turn the call over to Tucker Greene, to discuss our overall credit quality.

Thank you, David. The weighted average net debt to EBITDA of the companies in our investment portfolio increased to 6.1 times from 5.9 times during the third quarter. This increase is primarily attributable to a single position that had a debt in EBITDA, which we believe is one-time in nature. Excluding this one-time move, weighted average net debt to EBITDA would have been 5.9 times.

Importantly, our portfolio companies have both top line growth and EBITDA growth year over year on a weighted average basis. The weighted average interest coverage of the companies in our investment portfolio at quarter end remained flat at 1.5 times, as SOFR rates decreased very slightly for the quarter. We continue to monitor interest coverage sensitivity at underwrite for new investments and for each name in the portfolio. The underlying borrower's EBITDA growth combined with lower rate increases has provided stability to the coverage ratio.

And finally, turning to asset quality. As of December 31, 2023, one portfolio company was placed on nonaccrual status, LCG Vardiman Black, LLC, also known as specialty dental, a first-lien position representing less than 1% of fair value. Further, certain investments in three portfolio companies were removed from nonaccrual, two of which were due to repayment and one due to improvement in performance.

As of December 31, 2023, investments on nonaccrual status remained consistent at 2.3% of the total investment portfolio at fair value compared to 2.3% as of September 30, 2023, and decreased to 3.8% of the total investment portfolio at amortized cost from 4.2% as of September 30, 2023.

With respect to underperforming credits in the portfolio, it is worth noting that our upgraded platform also includes embedded workout resources and expertise to address the aforementioned underperforming credits that were predominantly originated prior to the integration. Of note, our restructuring team currently has an average of 13 years of industry workout experience.

Now I will now turn the call over to Stan Matuszewski, to walk through our financial results.

Thank you, Tucker. We ended the fourth quarter of 2023 with total portfolio investments at fair value of $3.4 billion, outstanding debt of $1.8 billion and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of Q4 was 1.11 times, which continues to be below our target leverage of 1.25 times. At quarter end, approximately 47% of the company's total principal amount of debt outstanding was in unsecured debt, and we had $724 million of capacity available under our secured revolving credit facility.

As previously mentioned, during the quarter, we executed an extension of the maturity of our secured revolving credit facility from May 2027 to October 2028. As a reminder, we have two separate unsecured notes due February 2025 and January 2026, respectively. As we mentioned on last quarter's call, we plan to address these maturities at the appropriate time.

Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we will also reference certain non-GAAP or adjusted measures. This is intended to make the company's financial results easier to compare to results prior to our October 2020 merger with MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results.

For Q4, GAAP and adjusted after-tax net investment income were $61.8 million and $60.7 million respectively, as compared to $72.9 million and $69.7 million respectively in the prior quarter. On a per-share basis, GAAP net investment income was $0.56, excluding the impact of asset acquisition accounting in connection with the merger with MMLC adjusted net investment income for the quarter was $0.55 per share, equating to an annualized net investment income yield on book value of 15%.

Importantly, we would note that while total investment income declined between the third and fourth quarters, the decline was driven by lower nonrecurring recurring investment income, resulting from a decrease in repayment related activity despite an increase in recurring investment income.

Finally, the PIK percentage of our total investment income decreased slightly quarter over quarter and is only slightly up year over year remaining in the single digits. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $118 million or $1.8 per share on a per-share basis, which we believe provides continued stability on our consistent dividends since inception. As Alex mentioned, net asset value per share on December 31, 2023, was $14.62 as compared to $14.61 last quarter.

With that, I'll turn it back to Alex for closing remarks.

Thanks, Dan, and thanks, everyone, for joining our earnings call. We remain optimistic about the performance of our portfolio, the current environment, and outlook for deployment into attractive opportunities.

With that, let's open the line for Q&A.

(Operator Instructions)

Finian O'Shea, Wells Fargo Securities.

Hey, everyone, good morning. Alex, we were interested in some of your initial comments on the integration. There are historically three credit franchises with distinct strategies, so does this mean it's all collapsed into one strategy now? Or is there -- or else, like what's new about the way the platform works?

That's a good question. And again, it's all part of one platform now. And to your point, just for historical reasons, we had three different arms of Goldman Sachs that were in the private credit direct lending business. And then two years ago, we brought it all together. With respect to the various vehicles that we have, they continue to pursue their own distinct strategies.

So for example, we have other pockets of capital that are in the large cap senior lending space, and that continues. GSBD has and will continue to focus on the core middle market. And then we have other pockets of capital that focus on mezz, on hybrid special sits, et cetera. And so it all brings it together, it's all on the private side here at Goldman.

And so it just allows us to take advantage of the broader ecosystem, as I mentioned, where we can get the full benefit of all the sourcing and origination and the army of bankers that we have, talking to companies and sponsors every single day, and it just brings a full weight of the firm. And it just allows us to have a wide funnel as we've talked about proprietary deals and the benefit of just really strong due diligence.

At the same time, it's one team. So we don't have different teams. So in the US, we have about 80 investment professionals, and they're all focused on origination and core underwriting. And then when we source a deal, an investment, we know exactly where it's going to go based upon the various vehicles and strategies that we have. So we just want to be a direct lending solutions provider to our borrowing clients.

Sure, how much -- like within the other strategies, what's the benefit of like a core middle market deal? How much more capital do you have to say, lead a deal or drive terms in all of the above, like what helps the -- go ahead, sure.

Yes, that's a great question. So first of all, what we couldn't do before was if the large cap pocket of the firm originated a deal that was called core GSBD focus area [$54 million] of EBITDA. It was just too small for the large cap. We could not refer it to GSBD just would -- even if we wanted to, just weren't allowed to. So and when we obviously collapsed it, GSBD now gets the benefit of that origination.

On top of that, as we've also talked about, GSBD has its own vehicle, has its capital, as you know. But when we're in an increasingly competitive environment where scale matters, for example, the Harrington deal that I just talked about, we have other pockets of capital that can speak for that deal in its entirety. So that allowed us as a platform to go to that sponsor and say we can underwrite the entire deal, give you the commitment for the entire financing so you can go win that sell-side auction. And that's exactly what we did. GSBD got an allocation to that, and so that's how you go to market now.

Okay. So if I combine -- if I take this, you can do larger deals and I think you were -- in the commentary, you also flagged like the nonaccrual as a pre integration credit. Does this mean you're going to move up in EBITDA in a meaningful way?

Now look, that's something we could explore at some point in the future. But as I mentioned, in terms of the criteria for the size that we've stuck to for GSBD, it's really at the businesses with EBITDA of up to $200 million.

And so that's why you just really haven't seen the EBITDA move up meaningfully. It ticked up a little bit in the fourth quarter, but it's still in around the $50 million, $55 million EBITDA range for the portfolio within GSBD. We have other pockets of capital that can pursue large cap as well as mid-market at the same time, GSBD is just -- we'll always be focused on -- we'll continue to be focused on middle market.

Okay. That's helpful. And last one for me on this thread, the other two groups historically sourced origination from the investment bank sponsor coverage, leverage finance, et cetera, is that going to bring the BDC franchise, does that come into that fold, are we now going to source from the investment bank?

So first of all, I appreciate that it's certainly an advantage to have the investment bank, they're originating investment opportunities for us. But still the vast majority of the deals that we've originated are really directly off the platform. Having said that, we get a tremendous amount of referrals that come in from investment banking, from private wealth, that cover the largest family of enterprises in the world.

If you look at just over the course of the year where we had the full year of the benefit of integration, roughly about a third of new deals that we did within GSBD came from this one Goldman Sachs advantage as we'll talk about. So we're not certainly relying upon investment banking to source for us, but it certainly provides additional flow and allows us to be a lot more selective about what we choose to do.

Awesome. Thanks so much.

Excellent.

Arren Cyganovich, Citi.

Thanks. I think you mentioned in your prepared remarks that you're seeing kind of activity or expecting activity to pick up in expectations for spreads to tighten. Are you seeing from a competitive standpoint, banks reentering into lending? Or just still primarily just the direct lenders you're competing with?

We're certainly seeing the BSO market reopening. And we have our own leverage finance department within banking that's certainly active. But what we're also seeing is that that's really a large-cap phenomena. We have our own large-cap vehicles, and we're certainly seeing additional competitive pressure from that standpoint.

In addition to the large amount of private capital that's just been raised overall. But we have not seen banks really get back into the core middle market, which is where GSBD plays. So although we have seen a bit of spread compression over the course of the year and quarter over quarter, it has not been the magnitude of what we've seen on the large-cap side of the business.

Okay. And then you had mentioned that you had one company that had a dip in EBITDA, but from a broader perspective in your portfolio companies, are you seeing continued EBITDA growth? Or is that starting to slow down or something?

We're certainly seeing continued EBITDA growth. So if you look at the fourth quarter on an LTM basis, our top line for the portfolio grew on a weighted average basis about 16.5% and on an EBITDA basis grew about 7.5%.

So what's also interesting is, if you look at EBITDA margins quarter over quarter, certainly seeing how our portfolio companies are passing along price increases to their customers. So EBITDA margins actually expanded about 130 basis points in the fourth quarter over the third. So we were really happy to see that.

It's helpful. Thank you.

Thank you.

Mark Hughes, Truist.

Yeah, thank you. Good morning. Just looking at your spread of rating, just looking at the percentage of the portfolio, kind of the one, through four, little bit of movement in there, still high quality, but a little bit of erosion. Is that kind of the higher for longer just interest coverage issue, what would account for a little bit of movement? And then do you think that's kind of hit it, it's worst? Is it -- should it stabilize from here given interest rate environment, given the economy, how do you see that?

I think with respect to the portfolio, there might be some movements from name to name. But in terms of the overall quality of the portfolio, we really haven't seen much movement. It's actually quite stable. As you saw, we moved one name rating two to rating three, and we took a mark on that particular position. But we also moved a number of names off of nonaccrual as well, as we exited those investments to have them, and another one actually, we put back on accrual, which is based upon good performance. So I wouldn't call out anything idiosyncratic about our portfolio. It's just really quarter over quarter just based upon a point that we've talked about.

Understood. And then on your net investment activity, sounds like more opportunities that you're looking at. You've had some decent repayment activity here lately. How do you think that's going to shake out in the near term? Is it still kind of a push or when do you start to get ahead of that?

In terms of activity, we remain quite optimistic about the second half of this year. Lots of different factors, which I'm sure you've heard of from us as well as other managers in space. But private credit continues to be driven really by private equity activity, leveraged buyouts, add-on activity. It's a well-known, just the sheer amount of dry powder that's out there.

In addition, there is a significant amount of our company that are owned by private equity firms that really just have to be monetized. With last year was the second lowest amount of distributions from private equity firms to their LPS in a quarter of course century. So in order for private equity firms to really raise the next fund, you're going to have to distribute capital.

So at the same time, just going back to Finn's question, we have the benefit of speaking with our investment bankers who sell many companies to private equity firms. And they will tell us that the backlog of companies that they've been mandated to sell just continues to sit at near record levels. So for all those reasons, we remain optimistic if rates do start to come down later in the year, that should signal more confidence so that we'll also just open the floodgates a bit more on M&A activity, and we will get our share of that.

Thank you.

Thank you.

(Operator Instructions)

Robert Dodd, Raymond James.

Hi, guys. On the repayment activity in the quarter. Obviously, that was pretty significant, but the repayment fees accelerated, the OID, et cetera, were down. Was that just coincidental or was there any effort by you to encourage the -- some of the older assets, which have a lower accelerated OID to migrate out of the portfolio? I mean, is this a part of the rotation or just coincidence?

Yeah. Hi, Robert. Yeah, it's just coincidence. I'd say last quarter we had some investments that exited that were some larger investments with a greater amount of OID, which was unamortized, some deals that had come over in the MMLC merger that had large on amortized balances. And that was really what was kind of driving up that non-recurring income last quarter. We did still see some accelerated amortization and repayment related interest income this quarter, but it just wasn't of the magnitude coincidentally with the handful of investments last quarter with the larger balances unamortized.

Got it. Thank you. On leverage, I mean, you are below target right now. I mean, obviously with rates where they are, you don't need to be pushing the envelope on leverage to produce earnings well in excess of the dividend. So is that -- should we expect leverage to ramp up rapidly? Or is it going to be relatively rapid depending on the market activity? Or is the intent to ramp it up a little slower as maybe as rates come down, that's kind of an offsetting factor?

Hey, Robert, it's David. No, I think you'll see us take that up slightly. I don't think you're going to see a rapid increase. As you know, it's 1.25 is our target leverage. So I think you'll see us in future quarters probably approach that level. But it's going to bounce around up and down a little bit from our target level depending on activity in the portfolio.

Got it. Thank you. And then on the -- last one for me. On the unsecured side, obviously, you don't have maturities until '25, '26. But would you be looking to potentially come to market as that opens up in maybe this year to increase your unsecured mix or prefund the '25s? And [high] to that, if you did, would you be looking to do that at a fixed rate or what, it would be a [preferred]? But would you be looking to swap that to manage the exposure to rate differentials? Or are you going to stay with your historic pattern of unsecured [fixed] rate?

I mean, look we're actively monitoring the market. As you point out, we have some 2025 maturities, so I think you'll see us address those at the right time. As far as fixed versus floating, we're going to evaluate that at time based on where the curve is and what's most beneficial to our investors, depending on when we execute a transaction.

Okay, thank you.

There are no other questions at this time.

Thank you very much, everybody.

Appreciate it. Thank you.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.